Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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the part rolled over is deemed to come first out of the “earnings” portion of the distribution. § 402(c)(2) , last sentence; Reg. § 1.402A-1 , A-5(b). See ¶ 2.2.05 (C) for more on this rule. These rules for tracking the participant’s “income” and “investment in the contract” in the distributing DRAC must be observed, in the case of a partial distribution from a DRAC, even if the distribution is a qualified distribution (so it is tax-free; ¶ 5.7.04 ), because of the possibility that the participant might later receive a nonqualified distribution from that DRAC; see ¶ 5.7.05 . However, a DRAC or Roth IRA that receives a rollover of a qualified distribution from a DRAC is apparently not required to keep track of the basis and income “inside” that distribution, because a qualified DRAC distribution that is rolled into a DRAC or a Roth IRA comes in as “investment in the contract” for purposes of taxation of later distributions from that receiving account. Reg. § 1.402A-1 , A-6(a), last sentence; § 1.408A-10 , A-3(a), third sentence. For general rules applicable to all rollovers of DRAC distributions, see ¶ 5.7.06 . DRAC- to-DRAC rollovers are subject to several additional very complicated rules: A. May roll to any other DRAC. An eligible rollover distribution from a DRAC can be rolled to any other DRAC (including a DRAC in a different type of plan; for example, a 403(b) plan DRAC can be rolled into a 401(k) plan DRAC), provided the recipient plan offers DRACs as part of its own elective deferral program, and provided the rest of the rules in this ¶ 5.7.07 are complied with. Reg. § 1.402A-1 , A-5(a); T.D. 9324 (Preamble). B. Direct rollover. The participant can do a DRAC-to-DRAC rollover by means of a direct rollover ( ¶ 2.6.01 (C)) of any DRAC distribution. If the distribution from the first DRAC is a qualified distribution, then the entire amount rolled into the transferee DRAC is allocated to the participant’s “investment in the contract” (basis) in the transferee DRAC. Reg. § 1.402A-1 , A-6(a). See “C” for the advantage of rolling the entire DRAC distribution into the new DRAC by means of a direct rollover. See “D” for the advantage of rolling at least some of the DRAC distribution into the new DRAC by means of a direct rollover. C. Total direct rollover preserves basis in excess of value . If the ENTIRE account in the distributing DRAC is transferred by direct rollover to the recipient DRAC, and the employee’s basis in the distributing DRAC exceeds the fair market value of the distribution, the employee’s basis in the distributing DRAC becomes part of his basis in the recipient DRAC, despite the fact that his basis exceeds the account’s value. This rule helps an employee whose DRAC is “under water” preserve his high basis when he changes jobs, and is a good reason to do a 100 percent DRAC-to-DRAC direct rollover in those circumstances. Reg. § 1.402A-1 , A-6(b). D. Direct rollover preserves holding period. One advantage of doing a direct DRAC-to- DRAC rollover is that the participant’s holding period from the transferor plan is tacked on to the holding period in the transferee plan for purposes of computing the Five-Year Period ( ¶ 5.7.04 (B)). With an “indirect” (60-day) rollover, the years in the prior plan will not count in computing the Five-Year Period for the transferee plan. § 402A(d)(2)(B) ; Reg. § 1.402A-1 , A-4(b). DRAC-to-DRAC rollovers